I live in El Paso, which isn't overseas but is right on the edge. I generally hate living in America but I don't mind El Paso. Most people here are Mexican and the Americans here are mostly the old fashioned kind that I don't mind. El Paso is right on the border with Juarez, Mexico which is too dangerous to visit right now but will be easy to visit when the violence dies down.

The reason I posting is because I am looking for someone to work with on a real estate investment idea I have. You can read about this here.

fschmidt wrote:I live in El Paso, which isn't overseas but is right on the edge. I generally hate living in America but I don't mind El Paso. Most people here are Mexican and the Americans here are mostly the old fashioned kind that I don't mind. El Paso is right on the border with Juarez, Mexico which is too dangerous to visit right now but will be easy to visit when the violence dies down.

The reason I posting is because I am looking for someone to work with on a real estate investment idea I have. You can read about this here.

Tell more about your ideas.

I think properties with potential net yields >8-9% are always interesting to consider. But I don't think they are easy to find in areas with no obvious problems. Property taxes in the US tend to be very high. For example, my parents home in small town Illinois (middle America) gets taxed each year at nearly 6% of the current market value. If they were to rent it out, they would probably make a negative net return. Of course, 6% is extreme, even in the States, but generally, you should expect around 2% which heavily eats into your yield.

If you bought a US$100K property in El Paso, what's the best monthly rent you think you could get? How much are property taxes there? Are the neighborhoods you're considering fairly safe? How strong is the rental market meaning how easy is it to find a renter? What do you estimate annual depreciation (repairs) would run?

fschmidt wrote:I live in El Paso, which isn't overseas but is right on the edge. I generally hate living in America but I don't mind El Paso. Most people here are Mexican and the Americans here are mostly the old fashioned kind that I don't mind. El Paso is right on the border with Juarez, Mexico which is too dangerous to visit right now but will be easy to visit when the violence dies down.

The reason I posting is because I am looking for someone to work with on a real estate investment idea I have. You can read about this here.

Tell more about your ideas.

I think properties with potential net yields >8-9% are always interesting to consider. But I don't think they are easy to find in areas with no obvious problems. Property taxes in the US tend to be very high. For example, my parents home in small town Illinois (middle America) gets taxed each year at nearly 6% of the current market value. If they were to rent it out, they would probably make a negative net return. Of course, 6% is extreme, even in the States, but generally, you should expect around 2% which heavily eats into your yield.

If you bought a US$100K property in El Paso, what's the best monthly rent you think you could get? How much are property taxes there? Are the neighborhoods you're considering fairly safe? How strong is the rental market meaning how easy is it to find a renter? What do you estimate annual depreciation (repairs) would run?

I think you identified the problem â€“ property taxes. Texas doesnâ€™t have an income tax, so they get all their revenue from property taxes. I use to own a house in Houston, and the property taxes were higher than the house I had in California. Where I live now in the Baja, prime ocean front property is selling cheap, because the Americans are freaked out about Mexico. When the drug war scare is over, they are going to come back and the values increase, and the property taxes in Mexico are really low.

I think properties with potential net yields >8-9% are always interesting to consider. But I don't think they are easy to find in areas with no obvious problems. Property taxes in the US tend to be very high. For example, my parents home in small town Illinois (middle America) gets taxed each year at nearly 6% of the current market value. If they were to rent it out, they would probably make a negative net return. Of course, 6% is extreme, even in the States, but generally, you should expect around 2% which heavily eats into your yield.

If you bought a US$100K property in El Paso, what's the best monthly rent you think you could get? How much are property taxes there? Are the neighborhoods you're considering fairly safe? How strong is the rental market meaning how easy is it to find a renter? What do you estimate annual depreciation (repairs) would run?

The listed property tax rate is high - 3.12%. But the effective rate is lower because it based on assessed value, not sale price. My real estate agent manages properties and I asked him to go through some of the properties that he manages to estimate net yields. He used a property tax rate of 2.43% for his calculations. The average yield was around 6%. That also take into account the vacancy rate which is very low here. We have military moving here and illegal Mexicans moving here to escape the violence in Mexico. The properties were bought almost at random with no attempt to estimate returns before buying. I think someone with brains could do much better. But even 6% isn't too bad compared to other types of investment out there like bonds. Managed real estate without leverage should act like an inflation protected income stream and I can't think of anything like this that pays 6% today.

The real idea here is to create an investment vehicle for investors like me to invest painlessly in unleveraged real estate. There is a lot of money out there looking for safety, so I think there is a need for this. People, rightly, don't trust Wall St anymore and need an alternative. So if this works, it should grow beyond El Paso to other middle American cities. But El Paso is a good place to start.

I think properties with potential net yields >8-9% are always interesting to consider. But I don't think they are easy to find in areas with no obvious problems. Property taxes in the US tend to be very high. For example, my parents home in small town Illinois (middle America) gets taxed each year at nearly 6% of the current market value. If they were to rent it out, they would probably make a negative net return. Of course, 6% is extreme, even in the States, but generally, you should expect around 2% which heavily eats into your yield.

If you bought a US$100K property in El Paso, what's the best monthly rent you think you could get? How much are property taxes there? Are the neighborhoods you're considering fairly safe? How strong is the rental market meaning how easy is it to find a renter? What do you estimate annual depreciation (repairs) would run?

The listed property tax rate is high - 3.12%. But the effective rate is lower because it based on assessed value, not sale price. My real estate agent manages properties and I asked him to go through some of the properties that he manages to estimate net yields. He used a property tax rate of 2.43% for his calculations. The average yield was around 6%. That also take into account the vacancy rate which is very low here. We have military moving here and illegal Mexicans moving here to escape the violence in Mexico. The properties were bought almost at random with no attempt to estimate returns before buying. I think someone with brains could do much better. But even 6% isn't too bad compared to other types of investment out there like bonds. Managed real estate without leverage should act like an inflation protected income stream and I can't think of anything like this that pays 6% today.

The real idea here is to create an investment vehicle for investors like me to invest painlessly in unleveraged real estate. There is a lot of money out there looking for safety, so I think there is a need for this. People, rightly, don't trust Wall St anymore and need an alternative. So if this works, it should grow beyond El Paso to other middle American cities. But El Paso is a good place to start.

I haven't thought about neighborhoods since all of El Paso is safe.

OK, well it definitely makes sense to explore your local area if there are opportunities. There's a big advantage to residing in the same area you make such investments. Unfortunately, not all of us live in areas with promising realty markets. Keep in mind that residential real estate may not keep pace with inflation for at least a few years because we are still working through the aftermath of the bubble.

As for alternatives to generating a decent yield while hedging inflation, here are a few:

- Some blue chip Brazilian corporate bonds (denominated in Brazilian Reals) are currently priced at yield-to-maturity levels of around 9.5%. If you are long term bearish on the US dollar, this bond gives you one type of hedge against dollar depreciation. But bonds do not hedge against local inflation.

- One Chinese corporate bond (denominated in CNH or offshore Renminbi) is slated to yield 6.25-6.5% on launch next week while currency has been smoothly appreciating against US$ by 2.5-4% each year. Again, no inflation hedge here but another type of currency hedge.

- In countries like Thailand and PI, you can invest in condo projects in high-demand areas during pre-launch at an attractive discount. This is not as high risk as it seems if you go with one of the top-tier developers. Once the project is completed, you may be able to capture net rental yields of 7-10% (remember you got in early and cheap) and own a natural inflation hedge. You could lever the yield up a bit with a mortgage with an international bank - US$ or local currency. If you go with a lesser developer, you take more risk. But if the project succeeds, you may capture yields between 9-15%.

- Australian and New Zealand 10 yr. sovereign bonds denominated in local currency currently yield nearly 5%.

- US 30 year treasury bonds currently yield about 4.25%. But don't touch these for the moment. We are currently at risk of a sovereign debt downgrade by Moody's if legislation is not passed to increase the debt ceiling by early August. If that comes to pass, you can be sure the yields on all US government securities will move-up significantly.

- Some Asian real estate is hot but may be over-heated now. One of my friends bought a 120 sq. meter property in central Shanghai for about US$414,000 around 3 years ago. He tells me he's now getting offers on it for US$1.7 million. Yields are generally quite low though.

Thanks for the alternatives, but I do want to mention the risks of these.

Brazil just elected a twice divorced woman president, which doesn't inspire a lot of confidence in the country. The previous president was great though.

Corporate bonds have a default risk that real estate doesn't. This is a serious issue in an economic crisis.

Directly investing in international real estate could work, but I think you would want to be in the country and understand it well before doing this. No way would I invest in a country that I don't understand.

Foreign government bonds have their own currency risk.

Rock wrote:Keep in mind that residential real estate may not keep pace with inflation for at least a few years because we are still working through the aftermath of the bubble.

I think you referring to resale value. But this makes no difference if you plan to hold and are only looking for yield. Yield should generally keep pace with inflation, maybe with some lag.

fschmidt wrote:Thanks for the alternatives, but I do want to mention the risks of these.

Brazil just elected a twice divorced woman president, which doesn't inspire a lot of confidence in the country. The previous president was great though.

Corporate bonds have a default risk that real estate doesn't. This is a serious issue in an economic crisis.

Directly investing in international real estate could work, but I think you would want to be in the country and understand it well before doing this. No way would I invest in a country that I don't understand.

Foreign government bonds have their own currency risk.

Rock wrote:Keep in mind that residential real estate may not keep pace with inflation for at least a few years because we are still working through the aftermath of the bubble.

I think you referring to resale value. But this makes no difference if you plan to hold and are only looking for yield. Yield should generally keep pace with inflation, maybe with some lag.

1. When Lula was elected, he was perceived as big risk, so much so that currency lost around 30% of its value soon after. Sovereign debt suffered as well and there was contagion risk from the Argentinian crisis. But he led Brazil into a new tier of respect and status and the country is now anticipated by many to become one of the world's largest economies in time. The new president was strongly backed by Lula prior to election and should be given more time before a clear judgment on her can be made. Her sex and marriage record are pretty much a non-issue IMO.

2. Yes, corporate bonds have default risk, especially lower rated ones. Blue chips are much safer. For example, a decade ago, you could get 10% from DBS perpetual debt in Singapore, a very safe bet. You should only put a small percentage of your capital in any one class of debt unless its extremely safe like DBS. A slightly less risky alternative is to buy into a high-yield bond fund. HYG is a good one which only fell 30-35% during 08-09 crisis and subsequently recovered most of this by the end of 2009. Yields shot up during the low period as fund maintained absolute dividend levels. Today the fund is near its 2.5 year high but still yields around 8% annually with dividend payments made monthly. The fund is totally liquid given its size and you can trade in and out of it with very low transaction costs.

3. When you talk about currency risk, its always there no matter what you do. My biggest mistake in the last decade was being highly overweight in US$. The closest you can come to mitigating currency risk - the risk of one fiat currency losing value against one or more alternative fiat currencies - is to use an broad based forex account to buy into a fairly representative basket of world currencies at a level commensurate with your total net asset base. For example, if your net worth is US$100,000 and you hold it all in US$, you can use inexpensive leverage in your account to buy the equivalent of a large basket of currencies (just a bit of each single currency) weighted according to their share of the global economy. Or if you plan on settling in a certain country eventually, you could put a heavier weighting into that currency. The key point to understand is that holding only US$ actually exposes you to a lot of currency risk unless you plan on consuming and investing primarily within the US for the rest of your life.

4. Generally, I think the key inflation hedge you get from owning property is not an inflation linked increase you may get from the rents but rather the market value of the property. But both come into play and depend on the general economy. During boom times, property values may shoot-up while rents hardly budge. That may be due to an increasing ratio of buyers/renters as a strong economy and low interest rates enable more people to move into owner class. Conversely, during recessions, property values may stagnate while rents move-up a bit due to the supply-demand shift. One final point - if you might ever want to tap into the value of your property to gain access to cheap money opportunistically when interest rates are low, re-sale value largely determines how much money you you can borrow.

5. Please share what you learn about El Paso real estate market after you do more research. I don't think 6% yields justify an investment for an outsider but 8% yields might. So please do share.

If you go a bit west to Tucson, a market I've become quite familiar with through difficult experience, you can probably do very well right now, possibly ten percent or better. I used an inheritance to buy a couple of rental condos there in May, 2009, when every realtor under the sun was saying the market had hit bottom. If I sold them today I'd lose at least $50K. Nevertheless, though I overpaid, they sill return about 5-6 percent.

I've kept my eye on the market -- Lord, don't delegate this to a realtor; they're all pie-eyed optimists -- and now that it has really crashed there are some very interesting possibilities out there. As an example, the same unit in the same complex that I paid $64K for plus $10K renovation, supposedly recently renovated and renter ready, is on offer for under $40K. Crunching all the numbers, including an estimate of $30 a month for repairs, you'd make 10 percent even if you paid full asking price, which you probably wouldn't have to.

Problems with real etate, of course. You're very illiquid. I can't get out of those units for the foreseeable future without getting killed. Any time you want to sell a foreclosure pops up and torpedoes the market. And there are those who think real estate still has another 20 percent or so to fall. And dealing with people. Finding competent and honest management is far more difficult than you might expect, at least in my experience. And tenants, of course. One of mine is late with the rent this month, and may have to be evicted.

I should add that I didn't figure in one month vacancy per year in my calculations, which I guess is SOP. Doing so brings the place I'm talking about in Tucson down to 8.3 percent yield at the asking price. Again, you could probably get it well below the asking price, bringing the yield up over nine percent.

And let meemphasize again that in real estate the people you have to deal with are going to drive you crazy if you let them. Good-hearted incompetence is about the best you can hope for. The American workplace is a predatory, feral, value-free environment now, especially the real estate world.

I tried working with my real estate agent on this, but that didn't work out because he has a strictly sales perspective. I can't trust him to crunch numbers. I could do it if I had the time, but I don't. So I hired someone who will come and work with me in a few months and then we will start buying. I'm going to stick to El Paso simply because I live here and I can visit properties myself easily.

I have another update on this old thread. I gave up and worked with my real estate agent here in El Paso. I bought 2 houses so far but I am not thrilled with how my real estate agent is handling this.

When I first came up with this idea, I tried to convince everyone I knew that creating a simple means for average people to invest in residential real estate would be a winner, but no one was interested. Now finally someone I talked to is interested. He is Chinese and his angle is that the Chinese (in China) have no safe investments there. They all fear the government and want a safe investment outside of China. So he thinks he could get lots of Chinese money to invest in American residential real estate. But once again the problem is finding someone to actually do the work. I will probably try to figure out how to get a Chinese here to do it. I don't trust Americans because modern Americans are generally shit - stupid, lazy, and dishonest people. But I figured I would post here in case anyone is interested. People here should be better than average since they aren't typical Americans.

If I were you I wouldn't farm out the market evaluation part. Just spend a lot of hours driving around El Paso's neighborhoods and get a sense of where you think value lies, taking into account as many factors as possible, including the type of people you're liable to have as tenants. This is the part where I would be leery of American inepitude.

They can handle the purchasing part OK, I'd imagine. There's a couple who own six units in my condo complex. They determined that the complex has value -- well-managed and underpriced -- but after that they don't get involved. They farm out the task of spotting foreclosures that will be auctioned, and the actual purchase at the auctions. They don't even need to look inside the unit because they know any can be rehabbed probably with $5k or much less, and current pricing of the units, especially at auction, make that cost acceptable. They just instruct their agents to buy whatever is available up to a certain amount.

The other task involved is managing the property, if you're going to hold it as a rental. You really don't want to deal with tenants. There are good management companies and there are very, very bad management companies. So shop around, and you may have to go through some bad experiences before you find one, but being right there in town helps a lot.

Shop around also to find a low-priced handyman for the rehab, whether as a rental or flip. In this economy there are plenty of capable people who will work for very little.

I understand your reservations about Americans, and I would stay away from them for anything involving judgment or valuation. They know the value of nothing. But familiarity with the particular market is the name of the game in real estate, and I don't see how importing someone from abroad gets you up the learning curve as fast as you need to go. If the task is defined, specific and mindless enough -- e.g., pounding nails or browbeating non-paying tenants -- you can find plenty of Americans to do it effectively, if you stay on them.